Interest rates and the carry trade

One factor that has especially sparked foreign interest in the real are Brazil’s high short-term interest rate levels, which have been on an upward trend. In early March, the Brazilian central bank hiked rates once again, bringing its Selic rate to 19.25 percent. The central bank has been on a tightening trend since September 2004, increasing the rate from 16.00 percent to its current level. Analysts expect that additional tightening in the Selic rate will be seen later this year, as the central bank continues to attempt to fight inflation.

“Brazilian interest rates are much higher than almost anything you can find anywhere else, and with the improving fundamentals, it’s almost a slam dunk,” says de la Fuente. “The carry trade has been phenomenal as more investors have piled in.”

“People who have dollars look for good investment opportunities,” says Albert Bernal, chief economist for Latin America at Ideaglobal. “They see the real as a currency with good liquidity and a great play because the country is looking better.”